Returns, interest rate variations and changes in foreign exchange rates in Asia

Abstract

The aim of the paper was to resolve the contradictory findings on exchange rate variability and stock returns on the basis of comparative evidence from Asian markets with interest rate variation serving as a moderator of the observed effect. The study applied the quantile and Bayesian Vector Autoregression technique from 2000 to 2023. The findings suggest that currency rate volatility and interest rate risk are two market risk variables that have a large and negligible direct influence on stock return, particularly over the long term. The results demonstrated a significant positive relationship between variations in exchange rates and return on assets, the latter being established at the medium to higher quantile of exchange rates. Return on assets reacts favourably to shocks related to interest rates and exchange rates. This may suggest that stock markets with substantial international operations are robust enough to withstand the volatility and risk brought on by currency rate swings. The results indicate that interest rate variations, which are favourable to the market, have a positive effect on returns. It implies that banks are motivated to extend credit to more people. When these factors move in same direction, there is a low sentiment in the market, a low risk and positive investor behaviour. Additional quantification of the magnitude and direction of volatility spillovers between exchange rates and stock returns show how these linkages are dynamic and vary depending on nations, time periods and market. The interdependence of exchange rate changes and stock returns within the larger financial ecosystem is highlighted by the volatility spillover that influences economic policy decisions, risk management techniques and investment strategies. The study concluded that during the analysed periods in Asia, the market risk variables taken into account in this model are important and substantial predictors of return on assets.